Higher bond yields for longer?

BOND yields around the world could have more room to climb as investors grapple with stubborn inflation, resilient economic growth and a flood of new debt that shows little sign of drying up.

With governments and companies competing for investors’ cash, the pressure on borrowing costs could remain a key market theme as the year draws to a close.

That is according to a recent Bloomberg report, which said the global sell-off in fixed income had pushed benchmark 10-year US Treasury yields to their highest since 2007.

More than half of 173 respondents to a recent Markets Pulse survey expected US 30-year Treasury yields to reach 6% by year-end.

The scale of the move is being felt well beyond the United States. Borrowing costs from Japan to France have been hitting new milestones, while the yield on the Bloomberg Global Aggregate Treasuries Total Return Index has climbed to its highest level since 2000.

Global bonds have fallen this year, even as equities continued to gain.

The question now is whether yields have already climbed far enough, or whether investors should prepare for another leg higher.

Gilles Moec, chief economist at AXA Group, was quoted by Bloomberg as saying: “Even if some key thresholds have been broken, we do not think long-term yields have necessarily reached a self-stabilising level yet.”

Apollo Global Management’s Torsten Slok is also among those arguing that rates could stay “higher for longer”.

One major reason is the global economy has been more resilient than many investors might have expected. Normally, weaker economic conditions tend to make bonds more attractive as investors look for safety. But that has not been the case this time.

Global business activity remains robust, with manufacturing gauges pointing to the strongest growth in years across major economies. Stronger growth can also keep inflation elevated and raise the risk of further interest-rate increases, while making equities look more attractive relative to bonds.

“Growth is still strong and if anything, after the recent Purchasing Managers’ Indices, is getting stronger,” Martin Harvey, fixed-income portfolio manager at Wellington Management, tells Bloomberg.

“Bonds are not a good hedge for equities right now,” he adds.

Crude rise

Higher commodity prices are adding to the problem.

Bloomberg has reported the United States-Iran war had created what Goldman Sachs Group called the largest-ever oil supply shock, with Brent crude rising as high as US$126.41 a barrel after the conflict disrupted energy flows through the Strait of Hormuz.

Higher oil prices feed into the cost of petrol, diesel, transport and other goods and services, making it harder for inflation to cool. Food prices have also been rising, partly because of recent heatwaves.

That creates another headache for bond investors because higher inflation reduces the value of the fixed coupon payments they receive in the future.

Interest rates themselves are also becoming an increasingly important driver of yields.

The US Federal Reserve (Fed) raised rates last month, while policymakers have signalled that further increases could be needed with inflation still above its 2% target.

Central banks in Australia and Japan have also raised rates, while traders are pricing in increases across the United Kingdom, Canada and Europe in the coming months.

A recently published paper cited by Bloomberg found that around 90% of the increase in nominal 10-year yields since August 2020 occurred around non-farm payrolls reports and speeches by key Fed officials.

That suggests investors’ expectations for short-term interest rates remain a major influence on longer-term yields.

Expanding debt

Meanwhile, the artificial intelligence (AI) boom is creating another source of pressure.

The race to build AI infrastructure has triggered a borrowing binge, with companies selling more than US$400bil of bonds globally this year to finance technology investments, much of it in the United States.

That means governments and companies are increasingly competing with AI-related borrowers for the same pool of investor money.

“This should eventually help push yields on high-quality government bonds – like US Treasuries – higher simply as a result of the booming supply,” writes Arif Husain, head of global fixed income at T Rowe Price, which oversees US$1.9 trillion in assets.

The spending behind that borrowing is also helping keep the US economy resilient despite higher borrowing costs, according to analysts at Barclays.

Government borrowing is another pressure point. The US government’s debt has passed US$40 trillion, while countries belonging to the Organisation for Economic Cooperation and Development are expected to borrow a gross US$18 trillion this year.

More debt means more bonds entering the market. To attract enough buyers, governments may have to offer higher yields, particularly if investors become increasingly concerned about deficits.

France is one example, with borrowing costs rising as investors position for next year’s election and the possibility of a populist government increasing spending.

“The seemingly relentless increase in long developed-market interest rates is another factor pushing several developed market economies toward unsustainable debt trajectories,” Katharine Neiss, deputy head of global economics at PGIM Credit, tells Bloomberg.

Steven Blitz, managing director for global macro and strategy at TS Lombard, says the lack of “political will to absorb a recession means the current rise in yields is not done at 6%”, with 8% potentially being reached in the next few years, according to Bloomberg.

Rising defence spending could add to the borrowing pressure. Global military expenditure is at a record, driven by the Iran war, the ongoing Ukraine conflict and broader rearming efforts across the North Atlantic Treaty Organisation, the Middle East and Asia.

The US defence budget reached US$1 trillion in fiscal 2026 for the first time, increasing the government’s financing needs and potentially adding to bond supply.

Government intervention

Japan could also have an outsized influence on global bond markets. Bloomberg says Japan may be selling foreign bonds to support the yen, with Finance Ministry data showing Tokyo’s foreign securities holdings fell by a record US$87.8bil at end-August from a month earlier.

Any further intervention could put additional pressure on global bonds. At the same time, rising Japanese rates are affecting the so-called yen carry trade, where investors borrow cheaply in yen and put the money into higher-yielding assets elsewhere.

Quoting Ed Yardeni, president and chief investment strategist of Yardeni Research, Bloomberg notes that rising rates in Japan are now “forcing carry traders to sell government bonds they bought worldwide with proceeds from cheap yen loans”.

US trade policy is another potential source of inflation, as US President Donald Trump’s ongoing trade war has raised concerns that higher tariffs will make imported goods more expensive, keeping price pressures elevated and reinforcing expectations that interest rates will remain higher for longer.

The bond market’s investor base is changing, too. The Fed and foreign central banks now account for a smaller share of US Treasury ownership, while private investors such as hedge funds have become more important.

Bloomberg Economics calculates that Fed and foreign official holdings of US Treasuries as a share of US gross domestic product have fallen by roughly 12 percentage points and eight percentage points respectively, since 2020.

New York Fed researchers say the market has become “increasingly price sensitive over time”, explaining a “significant portion of historical yield changes”.

Finally, the global savings glut that helped keep borrowing costs low for decades is fading. Citing Oxford Economics, Bloomberg notes that the forces behind persistent excess global savings since the global financial crisis – fiscal austerity, US deleveraging and Chinese exports – have either been unwound or constrained by protectionism.

That is happening at a time when governments and companies are demanding huge amounts of capital, potentially leaving investors in an increasingly powerful position to demand higher returns before putting their money to work.